New Restrictions Apply to Deferred Compensation Plans

On August 4, 2006, the New York office authored an Alert Memorandum entitled, “New Restrictions Apply to Deferred Compensation Plans.” This three-page memo discusses certain provisions of the Pension Protection Act of 2006 (the “Act”), which has been passed by the House of Representatives and the Senate and is expected to be signed into law by President Bush in the near future. The Act includes new restrictions on the funding of and reservation of assets under nonqualified deferred compensation plans that provide benefits for certain employees of public companies. Amounts that are transferred to a trust or set aside for the payment of benefits under a nonqualified deferred compensation plan in violation of these new rules will be treated as having been deferred in violation of Section 409A of the Internal Revenue Code of 1986, as amended, and will be immediately included in income and subject to an additional 20% tax plus interest penalties. Employers should review any funding or other similar arrangements in light of the new rules to determine whether such arrangements should be modified to avoid triggering these penalties.

The attached memorandum describes the new restrictions in further detail. To view a copy of Section 116 of the Act, which contains the provisions discussed in the memorandum, click here.